Growth: Why it Matters

Grant King is President of the Business Council of Australia. In an address to The Sydney Institute on Monday 10 December 2018. Grant King outlined why good economic growth equals jobs and opportunity, and a healthy economy. In doing this, Grant King also explained the critical importance of economic growth in meeting community expectations and the critical role of business in delivering such growth and achieving a stronger Australia for all.

GROWTH: WHY IT MATTERS

GRANT KING

Thank you for your kind introduction and the opportunity to speak with you this evening.

The broad theme for this discussion is that economic growth matters. It is only through growth that we can meet the expectations that we rightly have to live in a country which can provide for its citizens:

A meaningful job,

A growing income, and

A social safety net that looks after the genuinely disadvantaged.

I would like to talk to this topic by addressing three questions. Why are we not feeling more positive about our current circumstances? Why does growth matter? What policies and actions might create a better future for all Australians?

Why are we not feeling more positive about our current circumstances? Why does growth matter? What policies and actions might create a better future for all Australians?

To the first question – why are we not feeling more positive about our current circumstances? We live in an extraordinary world. We are the beneficiaries of the greatest improvements in the achievement of our potential in human history. Over the last two hundred years globally:

Our life expectancy has doubled,

People living in extreme poverty has fallen from more than 95% of the population to around 15%,

The percentage of the population that is literate has risen from around 15% to nearly 90%,

Child mortality rates have fallen from around 45% to 5%.

We live in a much safer and more peaceful world. We enjoy services and an amenity of life unimaginable to our grandparents. We can get fresh food in any season at almost any time of the day or night, withdraw cash from anywhere in the world 24/7 without having to wait for a bank branch to open, be warm when it’s cold and cool when it’s hot, access the world’s knowledge with a keystroke and stay in touch with our families and friends whenever we want.

It is business that makes this happen.

It is business that makes this happen.

The Economist magazine recently called Australia the miracle economy with 27 years of continuous growth:

The Economist magazine recently called Australia the miracle economy with 27 years of continuous growth

Over this time our economy as measured by GDP has grown 133%,

GDP per capita by 62%,

real wages have grown by 55%,

unemployment has fallen from a high of 11.2% in 1992 to 5.0% today.

Our population has grown by 44 per cent to 25 million, over 7 million of which were born overseas and who have contributed to our economy and enriched our society.

Arguably our economy is performing well, creating new jobs for a growing population, replacing jobs lost to the relentless march of new technology and globalisation. It has also provided the means to greatly expand services to our community with an increase of total government expenditure on:

education from 4.1% of GDP in 1990-91 to 5.2% of GDP in 2016-17

health from 4.7% to 7.0% of GDP

social security and welfare from 7.9% to 9.7% of GDP.

Contrary to the assertion by some:

we know from the Productivity Commission that all income groups have benefitted from the growth of the Australian economy with little increase in inequality between these groups.

there has not been a deterioration in job security. Casualisation in the workplace is at much the same level as the mid 1990s and involuntary job loss as a proxy for insecurity has almost halved in the last 20 years.

Economic and social outcomes today are materially better than they were in the 1980s. We were in deep recession in the 1980s and again in the early 1990s. Inflation reached 12.4% in September 1982 and real wages were stagnant to declining for most of the 1980’s. In 1983 unemployment peaked at 10.5% and was even higher at 11.2% in 1992. Mortgage rates hit a peak of 17%.

What a miserable decade. I remember it but about half the population don’t have any real experience of this time.

What a miserable decade. I remember it but about half the population don’t have any real experience of this time.

Arguably the poor state of the economy at that time created the acceptance of significant and at times, painful economic reforms. We believe that these reforms created the platform for 27 years of economic growth and up until the last few years real wages growth as well.

We know, both anecdotally and from recent surveys, such as the Community pulse 2018: the economic disconnect report from CEDA, that whilst our economy has grown many believe that they have not shared in the benefit from this growth.

I would argue that the benefit of this growth is an unemployment rate of around 5%. If the unemployment rate today was back at that peak rate of 11.2% in 1992, an additional 800,000 Australians would be out of work. The unemployment queue would be approaching 1.5 million people. That’s a very different story to the one we have today.

These 800,000 people are the true beneficiaries of economic growth but we, and they, do not know who they are. If there was ever to be proof of the benefits of economic growth it is surely the 800,000 more people that have a job, are earning an income, paying taxes and not requiring welfare support.

These 800,000 people are the true beneficiaries of economic growth but we, and they, do not know who they are.

A great economic benefit but more importantly one of the greatest goods a country can do for its citizens – provide them with a meaningful job, a reasonable income and all the independence and fulfilment that comes from it. However, the National mood does not reflect these outcomes. So why is this so?

It is a strange situation when there are so many positive economic and social indicators that there is so much negative sentiment in the community. Some might say that expectations are too high, that too many people want too much.

We say that in a prosperous, democratic country expectations should be high. If you are a CEO running an existing business or an entrepreneur starting a new one, if you coach a sporting team or conduct an orchestra you will have high expectations about what can be achieved. So too should all members of our community.

But, of course, if expectations are not met, we feel disappointed. We know that, when we look back, our economy has delivered the jobs that we need but we don’t feel that it has delivered a growing prosperity that we have shared in. Real wages growth has been very weak for the past six years and we feel that the cost of living is eating away any gains we are making. Hence our acute sensitivity to rising prices, for example in the cost of electricity.

We know that, when we look back, our economy has delivered the jobs that we need but we don’t feel that it has delivered a growing prosperity that we have shared in.

The recently published national accounts show how stubbornly persistent is low productivity and wages growth. Nonetheless, when we look back to the 1980s, we can see the economic benefits of the past 27 years of growth. We are nostalgic about the economic reforms of the 1980s and 1990s that underpinned this growth. We wonder why we can’t do this again but forget these reforms were born in much more difficult times.

When looking back over the past few years the other outcome we can’t ignore that affects our National mood is the significant loss of trust in all institutions. If there is a central theme to this loss of trust it is the egregious abuse of power and privilege by all institutions – be they business, government, unions, media, not for profits and other non-government organisations.

We are disappointed when:

businesses take unfair advantage of customers and employees,

politicians worry more about themselves than us,

unions seek through industrial power to disadvantage many for the benefit of a few,

trusted institutions breach the trust that is placed in them,

Media bias and misreporting makes informed understanding of important issues more difficult.

These disappointments are reinforced when representatives of one institution seek to compensate for their own deficiencies by dragging down through criticism another.

These disappointments are reinforced when representatives of one institution seek to compensate for their own deficiencies by dragging down through criticism another.

As I have said before trying to look good by making someone else look bad fixes nothing. The community is right to expect more than this from important institutions in society.

In my current role at the BCA I talk to many of our business leaders and I believe they know that business has to win back the trust and confidence of the community and are taking the necessary steps to do this. So, when we look back it is easy to see that some of our expectations have not been met.

We also have expectations about the future. Economists have won Nobel prizes for telling us what we instinctively know to be true. We worry much more about the risk of a loss than the opportunity for a gain. So, even if things looked good today, when we look to the future, we see a lot to worry about.

when we look to the future, we see a lot to worry about

The rising cost of living together with low wages growth makes us worry about falling, not rising, living standards in the years ahead. Will our children be the first generation to be worse off than their parents?

A year or so ago a big issue was the affordability of housing. Would a younger generation ever be able afford the ever-increasing cost of buying a home? That remains true. Now, with increasing global interest rates and tougher lending conditions following the Royal Commission property prices are falling and older people who own homes are just as worried about the fall in the value of their investment.

All home owners, young and old, are worried about the impact of rising interest rates on their household budget and are becoming more cautious. Again, we see this in the recently published national accounts with a slow-down in consumption growth and a fall in new housing investment.

The rise of the digital economy and the increasing rate of technological development such as robotics and artificial intelligence make us worry about whether there will be jobs for us and our children. Despite the evidence to the contrary the changing nature of work is making us feel less secure in our employment and feeds fears about increasing casualisation in the workplace.

The rise of the digital economy and the increasing rate of technological development such as robotics and artificial intelligence make us worry about whether there will be jobs for us and our children.

Population growth seems to be driving overcrowding in our cities and reduced access to essential services. The catch up in construction of infrastructure is creating inconvenience for the community and feeding these fears. So, to answer my first question there is little doubt in my mind that whilst there is much to be positive about, our past disappointments and future fears are driving an uncertain and unsettled National mood. So, to our second question. Why does growth matter?

To change the national mood to a more positive outlook we need to turn our current fears into future hopes. In my time as President of the BCA I have participated in many forums with representatives from many different interest groups. One of the things that has struck me is how many of these groups focus their advocacy on what I call ‘more for me’. Why they are more deserving of a greater share of the economic pie. By implication this means someone else must get less but rarely are these groups brave enough to say who this should be. They rarely articulate how to grow the economic pie. What I call “more for all”.

Economic growth is the only way to create “more for all”. Despite attempts by others to characterise BCA advocacy as focused narrowly on the interests of business I can assure you that the central focus of advocacy by the BCA has been and will continue to be on “more for all”.

Economic growth is the only way to create “more for all”.

The BCA has always advocated for fiscal conservatism to make sure our economy can survive shocks like a global recession, falling prices for our commodity exports or natural disasters. We have advocated for the efficient delivery of all of the services that governments provide our community.

But let me make clear, we are not talking about lesser services. For example, the Business Council has consistently made the point that we need to examine the adequacy of the Newstart allowance for single people and remove the barriers that prevent long-term unemployed Australians from getting – and staying – in the workforce. We have also called for a Productivity Commission inquiry into entrenched disadvantage. We need to improve outcomes for indigenous Australians. We must continue to find new ways to close the gap.

For the first two thirds of the 27 years of economic growth, GDP growth averaged 3.4% a year. We ended with budget surpluses, effectively no debt at a federal level, expanding services to the community, a mixture of tax reductions and targeted increases in welfare support.

In the last nine years, GDP growth has averaged 2.7% a year. We have run federal budget deficits, national debt has grown to uncomfortable levels given the risks in the Australian economy and we have added substantial long term expenditure commitments. In the most recently published national accounts GDP is growing at 2.8%, so we need to do better on this measure.

In the last nine years, GDP growth has averaged 2.7% a year. We have run federal budget deficits, national debt has grown to uncomfortable levels given the risks in the Australian economy.

At the BCA, we have argued that we need sustainable GDP growth above 3% if we are to generate “more for all”. The purpose of this target is not an end in itself, but the means to turn our current fears into future hopes.

To make sure that the economy is creating enough jobs to maintain high levels of employment.

That real incomes are growing so we can afford the necessities of life.

That people have access to education and training that allow them to maintain skills that will be relevant to the future of work.

That we can own our own homes and save for our retirement.

That we can support the genuinely disadvantaged.

If we can do this then we will have turned our fears into hopes. We can be more positive about the future. That’s why economic growth matters.

So, to our third question. What actions and policies might create a better future for all Australians? Not surprisingly I am going to begin this discussion by saying the policies we need are those that help business invest and our economy grow. And grow sustainably above 3% per annum.

It is businesses, big and small, that employ most Australians and the taxes that businesses and the people they employ pay fund the majority of the federal budget. However, before we talk about the policies we need we must begin this discussion by talking about the actions we must take to restore confidence and trust in the business community.

It is businesses, big and small, that employ most Australians and the taxes that businesses and the people they employ pay fund the majority of the federal budget.

We were deeply involved in the debate about the reduction in the corporate tax rate. The parliament chose to condemn Australia to a corporate tax rate at a globally uncompetitive level. The point is not about that decision but about the debate.

I believe we were winning the debate about the merits of the matter. However, the debate was shifted by those that opposed it, from whether the reduction was merited to whether it was deserved. An argument too easy to make because of the decline in confidence and trust in business.

It will ultimately be a tragedy for us all if the policies we need for business to make its contribution to a better future are rejected not because they are unnecessary but are somehow not deserved.

It will ultimately be a tragedy for us all if the policies we need for business to make its contribution to a better future are rejected not because they are unnecessary but are somehow not deserved.

To respond to this risk, I believe there are four areas that need to be worked on.

The first is that individual businesses must do better. They need to deal with their own issues in respect to their dealings with their customers, employees and the communities they serve. I believe our member businesses understand this and are working on these issues.

The second is where business needs to act in a consistent and collective way. An example of this is dealings between big and small businesses – an economic relationship that is worth $500 billion a year and is critical to the effective functioning of our economy. Our voluntary supplier payment code requiring small business customers to be paid within at least 30 days is an example of this.

The third is to continuously rebut the mistruths promoted by those who somehow believe our country can prosper without a strong and competitive business community.

The third is to continuously rebut the mistruths promoted by those who somehow believe our country can prosper without a strong and competitive business community.

Examples of these mistruths include the idea that business does not pay its fair share of tax.

Fact – according to the Tax Commissioner, company tax compliance by businesses in Australia “is around global best practice”. Companies paid $86 billion of company tax last year.

We’re also frequently told that work is less secure and that inequality is increasing.

Fact – casualisation in the workforce is at much the same levels since the mid-1990s, and involuntary job loss as a proxy for insecurity has almost halved in the last twenty years.

Fact – casualisation in the workforce is at much the same levels since the mid-1990s, and involuntary job loss as a proxy for insecurity has almost halved in the last twenty years.

And according to the Productivity Commission inequality has in fact declined recently and has only risen modestly since the 1980s. Importantly, the Commission found that sustained growth has delivered improved living standards across all income groups. Another fact.

Perhaps the greatest mistruth is the notion that we can have rising living standards without a strong and growing economy and without strong and growing businesses.

The fourth is to defend the ideas upon which our economic success is built. These include the belief:

The fourth is to defend the ideas upon which our economic success is built

that open, competitive markets result in the best allocation of scarce resources.

That free trade between nations builds wealth and lifts people out of poverty.

That the best form of welfare is a meaningful job.

That individuals make better choices about how they want to live their lives than do governments.

I think in Australia we also put a special emphasis on the idea of fairness. Many in business hold these ideas to be truths and don’t understand that many hold a contrary view. At the BCA we will defend these ideas because they anchor continuity in policy making. A failure to do so puts our future at risk.

Whilst we are all aware of the decline in confidence and trust in business, we also know that people understand the important role business plays in creating jobs and employing people. They want to hear from business leaders on the policies and actions needed to help business make Australia a better place

As has been evidenced over the past few years sustainable economic growth does not come easily – it has to be earned.

As has been evidenced over the past few years sustainable economic growth does not come easily – it has to be earned.

Business investment is a key driver of growth. It creates new opportunities and jobs growth. It drives productivity improvement and wages growth. These mechanisms are well understood so I won’t expand on them now. However, the recently released national accounts show some emerging risks to the current outlook. The softness in GDP growth is a touch concerning.

There are also other areas of concern. Investment has fallen over the past year – and although the CAPEX survey suggests improvement over the coming year that is at odds with current trends. Labour productivity growth rose 0.7% compared with the September quarter 2017, which is around half the long-term average. This does not augur well for wages growth. So, we need policies that will encourage, not discourage business investment.

Given our reliance on foreign capital to fund our growth we need to be a competitive destination for investment. We need policy reform in four areas for this to occur.

Given our reliance on foreign capital to fund our growth we need to be a competitive destination for investment. We need policy reform in four areas for this to occur

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Firstly, we continue to support broad-based, comprehensive tax reform. Ultimately the current system with its over reliance on direct taxation, the mismatch between Federal and State taxes and spending, the volatile State tax base and a globally uncompetitive tax rate for larger companies is unsustainable. If we are unable to embark on such broad reform, then on the company tax side we continue to support a single tax rate of 25% for all companies. We cannot step back from the need for a more competitive company tax system. We should at a minimum consider doing something meaningful on investment or depreciation allowances.

Secondly, how we regulate business is also fundamental to the competitiveness of our economy. Regulation is not an alternative system to a market economy; effective regulation is an integral component of a market economy. Effective regulation means more productive and competitive businesses, more job creation, improved product offerings and lower prices for consumers. Excessive regulation drags like an anchor on innovation and growth.

Regulation is not an alternative system to a market economy; effective regulation is an integral component of a market economy.

In practice this means we need to:

commit to best practice regulation making based on genuine consultation and co-design with industry, cost-benefit analysis, regular review and sunset clauses

move to global standards where ever it is feasible and safe to do so, recognising that many of the best opportunities for our businesses are in serving global markets.

change how we plan for and deliver major projects. Big, productivity enhancing projects should be able to get off the ground quicker and with greater certainty without compromising environmental or social standards

Ensure that our smaller businesses are not crippled by excessive regulation.

Make sure our regulators operate efficiently and are adequately resourced so they can properly do the tasks they are charged with.

Thirdly we need to move to a modern workplace relations system. This begins with a universal safety net that spells out basic rights and conditions such as the minimum wage, leave and entitlements, and a fair and transparent process for dismissal. It needs to be complemented by occupational health and safety laws and anti-discrimination laws to protect people at work.

This begins with a universal safety net that spells out basic rights and conditions such as the minimum wage, leave and entitlements, and a fair and transparent process for dismissal.

We cannot return to industry-wide bargaining. A system that looks to the future needs to work at an enterprise level where workers and managers can work together to grow their operations taking into account their specific circumstances.

At the BCA we have just completed a major review of the future of work. We have found that the safest jobs are the jobs in which there is rapid task change driven by the relentless change in technology and supported by constant training and reskilling. A key test for any system is its flexibility, its ability to respond to a rapidly changing world.

Entrenching industry wide agreements that imposes the same standards on all companies irrespective of their needs, is not only unworkable but more likely to destroy jobs than create them. It would hurt workers in regions and the least skilled and small business owners trying to get their enterprises to be global competitive.

Fourthly, we need to get energy and environment policies settled. Our mining and manufacturing businesses will not be internationally competitive if they are burdened by high energy costs. We will have achieved little if growing incomes are consumed by increasing energy bills.

Our mining and manufacturing businesses will not be internationally competitive if they are burdened by high energy costs.

This area is arguably the largest failure in public policy for many years. In the last four terms of parliament, two under Labor and two under Coalition governments, we have lurched from one extreme to the other in terms of policy outcomes. The most recent idea from government has been an idea the ACCC itself called “extreme” and warned against – breaking up electricity companies.

This ignores all the other actions and recommendations recommended by the government’s own experts that could be done now to help drive down electricity bills. It is unfathomable to many in the community that a country that is blessed with energy resources has experienced significant rises in energy costs and even a hint of unreliability in the supply of electricity.

The BCA has argued for moderate, not extreme, policies in this area that industry can rely upon and invest against. Instead we have had uncertainty and inconsistency. To place the blame on energy companies today for the high price of electricity is a blatant attempt to shift blame for the failure of public policy in this area over many years.

To place the blame on energy companies today for the high price of electricity is a blatant attempt to shift blame for the failure of public policy in this area over many years.

As I noted earlier, we have recently completed a major study with AlphaBeta on the much talked about concept of the future of work. Our research with AlphaBeta shows the most significant impact on our working lives will be in the way we perform the tasks that make up our jobs.

Embracing task change is the key to navigating the future of work. Over the last five years, workers in low-skilled jobs had the lowest rate of task change but the highest rate of retrenchment. Workers in high skilled jobs were the reverse: with the highest rate of task change and the lowest rate of retrenchment.

In order to keep people working and to keep jobs in Australia, we need to embrace the change within our jobs and be ready to adapt. Our data highlights the critical importance of Australians being able to access quality skills and training throughout their careers to keep pace with workplace and technological change.

we need to embrace the change within our jobs and be ready to adapt

This is the basis of the Business Council’s Future-proof report on reforming the post-secondary system, and is why the Business Council continues to advocate for:

One information system across VET and higher education:

One funding system that removes disproportional incentives for everyone to go to university;

And, a lifelong skills account that will allow people to access a variety of modules and qualifications so they can keep pace with task change while in the workforce.

Given our years leading the debate, we are very pleased that both major parties have now committed to holding inquiries into either VET or the post-secondary system more broadly. To make sure our cities are both productive, because they are a major driver of GDP growth, and good places to live we need to get the necessary development of infrastructure, and to encourage regional development to take some of the pressure off our cities.

The vitality of our regions and cities is critical to improving Australia’s productivity but over-crowding and congestion in our major centres routinely detracts from our quality of life. Strategic regional development can help encourage Australians into thriving regions. But it is clear we need to focus on greater purpose in how we plan our regions and cities, and how we set up centres of economic activity to create the conditions for investment, private enterprise and job creation.

We need to focus on greater purpose in how we plan our regions and cities, and how we set up centres of economic activity to create the conditions for investment, private enterprise and job creation

There is a long list of infrastructure policy initiatives which I won’t read out, but they include:

In our regions we need a hub and spoke model of infrastructure delivery and the autonomy to adopt the right policies for individual areas.

We need to:

reserve corridors for innovations such as the very fast train

make it easier to attract businesses and investment outside our major cities by reducing red-tape

attract workers by removing the disincentives that stop people relocating such as stamp duty, and

encourage migrants out of the cities. We need more carrot than stick.

Our cities underpin our economy. We must unclog them to ensure people can live and work productively. The implementation of these policies and actions will go a long way towards helping us change our current fears to future hopes.

Our cities underpin our economy. We must unclog them to ensure people can live and work productively.

However, the political instability we have experienced over the past few years has eroded our belief that we are capable of making the reforms that we need to keep our economy growing and make sure that the benefits of that growth are shared fairly across the community.

With an election to be held in the next year, the Australian people will choose their next government. Our involvement in the time leading up to that election will be to argue for the policies we believe will make Australia a better place. A place where our disappointment is replaced by encouragement and where our current fears are replaced by greater hope for the future.